What is Corporate Veil?

The “Lifting of Corporate Veil” is a well-known term in the corporate world. Any business or entity has its own separate legal identity distinct from its other members or shareholders. The business having its own name and sustenance is regarded as a natural person within its power in the corporate industry. Thus, it does not need to regard its shareholders for its detrimental effects done in the name of the company. In this article, we shall delve into all the intricacies of a corporate veil in a private company and all its effects worldwide.

What is the meaning of a Corporate Veil?

Generally, the personal assets of a company of limited liability partnership are provided as a source of indemnification when the company has fallen on debts or bankruptcy. The members or shareholders who have similar equity in the company are let free from the obligations incurred on the company as under the Companies Act, 2013, a company is defined as a separate legal entity. The penalties are recompensed in the way of investing or liquefying assets in the markets.

Hence, the shareholders of a company are completely absolved from utilizing their personal assets for accruing the debts. However, there are typical testimonies where the court can put forward the liabilities of the debts on the parts of the members when any malfeasance is from the end of the officials are proved.  

Features of a Corporate Veil

The features of the corporate veil are as below:-

Limited Liability Protection:

As per the act, Limited Liability is the structure where individuals or members of the business entity are protected from the liabilities or debts occurred in the business. It only extends to the capitals shared by the stakeholders on the business devoid of any personal properties.  

Alluring Investors:

The freedom of safety and not getting bankrupted in their personal assets while the downfall in the business, it invites more investors in the business to create a more solid structure of the business. For capital investment, it gives a sense of security to the investors to pile up more money in the business.

Separate Legal Entity:

The concept of corporate veil depends on the fact of being a separate legal entity. Any corporation or LLC can purchase shares, carry on transactions & engage in contracts using its own name. Thus, the names of the stakeholders or the business persons are not essential for such activities to take place in the first place.

Piercing the Veil:

When a business entity is protected by Limited Liability, yet if its core conditions of the existence as a legal entity are violated by the business persons, then such business persons are equally liable to recuperate the company from such damages. Though, it can be done through company’s representation, the court in such cases can intervene and involve the business owners or stakeholders for recovery of such debts.

Doctrine of ‘Piercing the Corporate Veil’

The corporate veil aims to protect the stakeholders in the capacity to save them in the happening of a collapse in the company. However, sometimes the directors, stakeholders or owner can be equally liable to rescue the company from such damages. This is called “piercing or lifting of the corporate veil”. It is legal decision is taken by the court to thrust the liabilities of company upon its directors or stakeholders. These rights are burdened to the company stakeholders in the event of malpractice, abuse of powers or any other mala fide activities done by the company’s name.

When can Piercing of the Corporate Veil be evoked?

Companies are regarded as a legal entity by section 15 of the Companies Act, 1993 which makes separate from its stakeholders. In the case of Salomon v A Salomon and Co Ltd [1897] AC 22, the Salomon principle was derived to separate a company from its directors, shareholders, employees and agents. This means as a separate legal entity, a company can be sued in its own name and own assets separately from its shareholders. However, there are several instances, where the corporate veil can be lifted by a proper adjudicating authority.

The following circumstances are taken into consideration while evoking “piercing of corporate veil” in a business:-

·         In case a business fails to conform to the applicable rules and maintain its business in good standing with the state where it is incorporated. In this process, the court may make is it liable for compensation by piercing the corporate veil.

·         Businesses have failed to meet the tax obligations and lacks behind funds to maintain the minimum capital prescribed by law comes under the purview of a competent forum for piercing its corporate veil.

·         If a business mixes the corporate funds with personal expenses of the shareholders or defrauds the consumers, the person is liable to come outside the shield of corporate veil and recover the debts or expenses of the company as a consequence of such activities.

Relevant Cases of Lifting of Corporate Veil

1.      Connors Bros Ltd. And Ors vs. Bernard Connors: When a company is incorporated in a state which is at that period engaged in a geographical war with the other country, such companies are meant to be out of the boundary of corporate veil. For example, in this case the company carrying on the transaction was German and German and English was at war at that time. Thus, the transaction between the two companies could not be carried out due to infringement of the public policy.

2.      CIT vs Meenakshi mills Ltd, AIR 1957 SC 819:

When a company is formed merely to evade the taxes it is pierced by the court of law under the aegis of the Companies Act. Here, the apex court held that the Income Tax official would be rightful to lift the corporate veil when such case happens.

3.      Gilford Motor Company vs. Horne, 1933:

In this case, it was held that the company cannot be regarded as a separate entity when the only objective of the company id to carry on illegitimate actions by Horne. The court adjudged that such a company cannot be materialized as a legit company and injunction was issued against Horne.

Conclusion:

A corporate veil aims to protect the company authorities to be secured of their personal liabilities in case any mishap happens in the company which the company stakeholders are unable to manage. Inspite of that, many companies shielded by such corporate veil involve in misappropriation which ultimately harms the entity. Such actions are not entertained in the eye of law. Thus, the theory of lifting of corporate veil can be imposed to prohibit such corporate stakeholders from resorting to any dishonest action that would be detrimental to the welfare of the company.